LARGE importers and exporters are starting to make greater use of index-linked container contracts (ILCCs) in their freight agreements with ocean carriers, according to Drewry's Container Freight Rate Insight.
But fixed-rate agreements remain the norm for most annual contracts, said Drewry, though it added index-linked contracts benefit importers and exporters by using external indices to enable price adjustments in multi-year agreements, thus contractual relationships can last no longer needing renegotiation when the market changes.
Allowing the price to fluctuate with the market, decouples it from the operational part of the contract, said London-based Drewry. This, it said, reduces the risk of carriers refusing to honour capacity or contract commitments, which can result in rollovers and disruptions to supply chains.
Index-linked contracts allow freight rates to be adjusted during the life of the agreement by reference to an external, independent market price index.
Speaking at a recent Container Freight Derivatives Association's (CFDA) Global Container Freight Forum in London, Lowry Crook, chief of staff at the US Federal Maritime Commission (FMC), said that over 50 index-linked contracts had been filed with its organisation this year. He said that most index-linked contracts are based on annual price adjustments, although some adjust half-yearly or quarterly.
The FMC has a good knowledge of shipping agreements as all carrier-shipper service contracts on all the routes to and from the US must be filed with the agency by law. According to the FMC, half of all index-linked contracts on US trades reference Drewry's freight rate benchmarks.
The index is used as a tracking mechanism for the price but does not set the absolute rate. Hence, shippers are able to use the index to negotiate competitive rates at say, US$100 per TEU lower than the index value, by using index-linked contracts.
If required, it is also possible to hedge rates on certain routes under an index-linked contract by entering into a separate agreement with a container freight rate derivatives broker.